Barth 2008 Jar Ias and Accounting Quality Main

DOI: 10.1111/j.1475-679X.2008.00287.
x
Journal of Accounting Research
Vol. 46 No. 3 June 2008
Printed in U.S.A.
International Accounting Standards

and Accounting Quality
M A R Y E . B A R T H , ∗ WAY N E R . L A N D S M A N , †
AND MARK H. LANG†
Received 15 March 2005; accepted 20 September 2007
ABSTRACT
We examine whether application of International Accounting Standards

(IAS) is associated with higher accounting quality. The application of IAS
reflects combined effects of features of the financial reporting system, in-
cluding standards, their interpretation, enforcement, and litigation. We find
that firms applying IAS from 21 countries generally evidence less earnings
management, more timely loss recognition, and more value relevance of ac-
counting amounts than do matched sample firms applying non-U.S. domestic
standards. Differences in accounting quality between the two groups of firms
in the period before the IAS firms adopt IAS do not account for the posta-
doption differences. Firms applying IAS generally evidence an improvement
in accounting quality between the pre- and postadoption periods. Although
we cannot be sure our findings are attributable to the change in the financial
reporting system rather than to changes in firms’ incentives and the economic
environment, we include research design features to mitigate effects of both.
∗ Graduate School of Business, Stanford University; †Kenan-Flagler Business School, Univer-

sity of North Carolina. We appreciate helpful comments from Bill Beaver, Utpal Bhattacharya,
Ole-Kristian Hope, Karl Lins, Doug Shackelford, Patricia Walters, T. J. Wong, Steve Young,
Ray Ball (editor), an anonymous referee, and workshop participants at the Athens University
of Economics and Business, Southern Methodist University, the 2005 Pennsylvania State Uni-
versity Accounting Research Conference, the 2005 Joint Journal of Accounting Research-London
Business School Conference on International Financial Reporting Standards, and the 2006
New York University International Accounting Convergence and Capital Markets Integration
Conference; research assistance of Yang Gui, Yaniv Konchitchki, and Christopher Williams;
and funding from the Center for Finance and Accounting Research, Kenan-Flagler Business
School.
467
Copyright
C , University of Chicago on behalf of the Institute of Professional Accounting, 2008
468 M. E. BARTH, W. R. LANDSMAN, AND M. H. LANG
1. Introduction
The question we address is whether application of International Account-
ing Standards (IAS) is associated with higher accounting quality than appli-
cation of non-U.S. domestic standards. 1 In particular, we investigate whether
accounting amounts of firms that apply IAS exhibit less earnings manage-
ment, more timely loss recognition, and higher value relevance than ac-
counting amounts of firms that apply domestic standards. The accounting
amounts that we compare result from the interaction of features of the
financial reporting system, which include accounting standards and their
interpretation, enforcement, and litigation. Because our interest is in the
quality of the accounting amounts that result from the financial reporting
system, we make no attempt to determine the relative contribution of each
of its features. We refer to the combined effect of the features of the finan-
cial reporting system as the effect of application of IAS. Our results indicate
that firms applying IAS have higher accounting quality than firms that do
not and that accounting quality improves after firms adopt IAS.
A goal of the International Accounting Standards Committee (IASC), and
its successor body the International Accounting Standards Board (IASB),
is to develop an internationally acceptable set of high quality financial re-
porting standards. To achieve this goal, the IASC and IASB have issued
principles-based standards, and taken steps to remove allowable accounting
alternatives and to require accounting measurements that better reflect a
firm’s economic position and performance. Accounting quality could in-
crease if these actions by standard setters limit management’s opportunistic
discretion in determining accounting amounts, for example, by managing
earnings. Accounting quality also could increase because of changes in the
financial reporting system contemporaneous with firms’ adoption of IAS,
for example, more rigorous enforcement. Thus, we predict that accounting
amounts based on IAS are of higher quality than those based on domestic
standards.
However, there are at least two reasons why our predictions may not be
borne out. First, IAS may be of lower quality than domestic standards. For
example, limiting managerial discretion relating to accounting alternatives
could eliminate a firm’s ability to report accounting measurements that are
more reflective of the firm’s economic position and performance. In ad-
dition, the inherent flexibility in principles-based standards could provide
1 IAS were issued by the International Accounting Standards Committee (IASC). The Inter-
national Accounting Standards Board (IASB), the successor body to the IASC, issues Interna-
tional Financial Reporting Standards, which include standards issued not only by the IASB but
also by the IASC, some of which have been amended by the IASB. With the exception of an
amendment of IAS 19, relating to the asset ceiling test for employee benefits, our sample pe-
riod predates the mandatory effective dates of standards issued by the IASB. However, the IASB
issued several amendments to IAS in December 2003 that firms could choose to implement
before the mandatory effective dates.
INTERNATIONAL ACCOUNTING STANDARDS 469
greater opportunity for firms to manage earnings, thereby decreasing ac-

counting quality. Second, the effects of features of the financial reporting sys-
tem other than the standards themselves could eliminate any improvement
in accounting quality arising from higher quality accounting standards. This
could occur, for example, if enforcement of accounting standards is lax.
We interpret earnings that exhibit less earnings management as being of
higher quality. Our metrics for earnings management are based on the vari-
ance of the change in net income, the ratio of the variance of the change
in net income to the variance of the change in cash flows, the correlation
between accruals and cash flows, and the frequency of small positive net
income. We interpret a higher variance of the change in net income, higher
ratio of the variances of the change in net income and change in cash
flows, less negative correlation between accruals and cash flows, and lower
frequency of small positive net income as evidence of less earnings man-
agement. We also interpret earnings that reflect losses on a more timely
basis as being of higher quality. Our metric for timely loss recognition is
the frequency of large negative net income. We interpret a higher fre-
quency as evidence of more timely loss recognition. Finally, we interpret
accounting amounts that are more value relevant as being of higher qual-
ity. Our metrics for value relevance are the explanatory powers of net in-
come and equity book value for prices, and stock return for earnings. We
interpret higher explanatory power as evidence of more value relevance.
All of our accounting quality metrics are based on those used in prior
research.
We base our inferences on a sample of firms in 21 countries that adopted
IAS between 1994 and 2003. Ideally, we would base our inferences on a sam-
ple of firms that are randomly assigned to apply IAS. However, our sample
period precedes the mandatory application of IAS for most sample firms,
and thus firms may have adopted IAS in response to changed incentives.
Thus, we could detect an improvement in accounting quality for firms that
apply IAS that is attributable to changes in incentives and not to changes in
the financial reporting system. To mitigate the effects of changes in incen-
tives, when constructing our accounting quality metrics relating to earnings
management and timely loss recognition, we include controls for factors
that prior research identifies as associated with firms’ voluntary accounting
decisions, for example, growth, leverage, and the need to access the capital
markets. Our metrics of accounting quality also reflect the effects of the
economic environment that are not attributable to the financial reporting
system. The economic environment includes volatility of economic activ-
ity and the information environment. To mitigate these effects, we use a
matched sample design by selecting a firm that applies domestic standards
in the same country as, and of size similar to, each sample firm that applies
IAS. We compare accounting quality metrics for the two groups of firms. In
addition, some of the controls we include when constructing our metrics
also are proxies for the economic environment. Although we include these
research design features, we cannot be sure that our findings are attributable
to the change in the financial reporting system rather than to changes in

firms’ incentives and the economic environment.
We begin by comparing accounting quality metrics for firms applying
IAS to those applying non-U.S. domestic standards in the period after the
firms applying IAS adopt IAS, that is, the postadoption period. This permits
us to test whether firms applying IAS have higher accounting quality than
firms that do not. We find that in the postadoption period firms applying
IAS generally evidence less earnings management, more timely loss recog-
nition, and more value relevance of accounting amounts than do firms not
applying IAS. In particular, firms applying IAS have a higher variance of
the change in net income, less negative correlation between accruals and
cash flows, higher frequency of large negative net income, and higher value
relevance of net income and equity book value for share prices, with each
of these differences being significant. In addition, they have a higher ratio
of the variances of change in net income and change in cash flow, lower
frequency of small positive net income, and higher value relevance of net
income for good news stock returns, although these differences are not
significant.
Firms applying IAS and domestic standards could exhibit differences in
accounting quality in the postadoption period because they differ in the
period before the firms applying IAS adopt IAS, that is, the preadoption pe-
riod. To determine whether this is the case, we compare accounting quality
of the two groups of firms in the preadoption period. We find that differ-
ences in our accounting quality metrics in the preadoption period do not
explain the differences in the postadoption period. In the preadoption pe-
riod, all but one of the quality metrics for firms that later apply IAS differ
insignificantly from those for firms that do not apply IAS. The matched
sample design might not fully control for differences in the economic en-
vironment. Thus, we also compare accounting quality metrics for firms ap-
plying IAS in the pre- and postadoption periods, thereby effectively using
each firm as its own control for these differences. We find that firms apply-
ing IAS exhibit higher accounting quality in the postadoption period than
they do in the preadoption period, with four of the eight differences be-
ing significant. Because the economic environment can change over time,
we also test whether the increase in accounting quality for firms that apply
IAS is greater than that for firms that do not. We find that, generally, the
increase in accounting quality is greater for firms applying IAS, although
almost all of the differences in changes in accounting quality metrics are not
significant.
We contribute to the literature examining the quality of IAS-based ac-
counting amounts in two ways. First, we use a broad sample of firms in
many countries adopting IAS over several years. In contrast, prior research
typically focuses on individual countries using data from limited time pe-
riods. Second, we use an array of quality metrics drawn from a common
time period and use a common set of control variables. Findings from prior
research comparing the quality of accounting amounts based on applying
IAS and domestic standards are mixed, which could be attributable to using
different metrics, drawing data from somewhat different time periods, and
using different control variables.
The remainder of the paper is organized as follows. The next section de-
velops the hypotheses and section 3 explains the research design. Section 4
describes the sample and data, and section 5 presents the results. Section 6
offers a summary and concluding remarks.
2. Hypothesis Development
2.1 IAS AND ACCOUNTING QUALITY
The first IAS were published in 1975 by the IASC, which was formed in
1973. Since then, the process for setting IAS has undergone substantial evo-
lution, culminating in the 2001 restructuring of the IASC into the IASB. In
recognition of the quality of the core set of IAS, in 2000 the International
Organization of Securities Commissions recommended that the world’s se-
curities regulators permit foreign issuers to use IAS for cross-border offer-
ings (IOSCO [2000]). As of 2005, almost all publicly listed companies in Eu-
rope and many other countries are required to prepare financial statements
in accordance with International Financial Reporting Standards (IFRS).
In addition, the Financial Accounting Standards Board has embarked on
a comprehensive project aimed at convergence between IFRS and U.S.
standards.
A goal of the IASC and IASB is to develop an internationally acceptable
set of high quality financial reporting standards. To achieve this goal, the
IASC and IASB have issued principles-based standards, and taken steps to
remove allowable accounting alternatives and to require accounting mea-
surements that better reflect a firm’s economic position and performance
(IASC [1989]). Limiting alternatives can increase accounting quality be-
cause doing so limits management’s opportunistic discretion in determining
accounting amounts (Ashbaugh and Pincus [2001]). Accounting amounts
that better reflect a firm’s underlying economics, resulting from either
principles-based standards or required accounting measurements, can in-
crease accounting quality because doing so provides investors with infor-
mation to aid them in making investment decisions. These two sources of
higher accounting quality are related in that, all else equal, limiting oppor-
tunistic discretion by managers increases the extent to which the accounting
amounts reflect a firm’s underlying economics. Consistent with this line of
reasoning, Ewert and Wagenhofer [2005] develop a rational expectations
model that shows that accounting standards that limit opportunistic dis-
cretion result in accounting earnings that are more reflective of a firm’s
underlying economics and, therefore, are of higher quality. Accounting
quality could also increase because of changes in the financial reporting
system contemporaneous with firms’ adoption of IAS, for example, more
rigorous enforcement. Thus, we predict that accounting amounts resulting
from application of IAS are of higher quality than those resulting from
application of domestic standards. 2
Although we predict that application of IAS is associated with higher ac-
counting quality, there are at least two reasons why this may not be true. First,
IAS may be of lower quality than domestic standards. For example, limiting
managerial discretion relating to accounting alternatives could eliminate
the firm’s ability to report accounting measurements that are more reflec-
tive of its economic position and performance. In addition, the inherent
flexibility in principles-based standards could provide greater opportunity
for firms to manage earnings, thereby decreasing accounting quality. This
flexibility has long been a concern of securities markets regulators, espe-
cially in international contexts (e.g., Breeden [1994]). 3
Second, even if IAS are higher quality standards, the effects of features
of the financial reporting system other than the standards themselves could
eliminate any improvement in accounting quality arising from adopting
IAS. Cairns [1999], Street and Gray [2001], Ball, Robin, and Wu [2003],
and Burgstahler, Hail, and Leuz [2006] suggest that lax enforcement can
result in limited compliance with the standards, thereby limiting their ef-
fectiveness. Cairns [1999] and Street and Gray [2001] find substantial non-
compliance with IAS among firms purportedly applying IAS. In particular,
for the 279 firms that refer to application of IAS in their 1998 financial
statements, Street and Gray [2001] examine disclosed accounting policies
for consistency with major IAS pronouncements. The study finds that, in
many cases, disclosed accounting policies are inconsistent with IAS. Ball,
Robin, and Wu [2003] examine timely loss recognition for firms in Hong
Kong, Malaysia, Singapore, and Thailand. In these countries, accounting
standards are largely derived from common law and, therefore, likely are
similar to IAS. Ball, Robin, and Wu [2003] find that timely loss recogni-
tion for firms in these countries is no better than it is for firms in code
law countries. Ball, Robin, and Wu [2003] attribute this finding to differing
incentives of managers and auditors. Burgstahler, Hail, and Leuz [2006]
find that strong legal systems are associated with less earnings management.
The study attributes this finding to different incentives created by market
pressures and institutional factors to report earnings that reflect economic
performance.
Findings in Bradshaw and Miller [2007] suggest that the regulatory and
litigation environment also is important to the application of accounting
standards. In particular, Bradshaw and Miller [2007] study non-U.S. firms
that assert that their domestic standards-based financial statements are in
2 Findings in Ashbaugh and Pincus [2001] also suggest that IAS are of higher quality by
showing that firms applying IAS exhibit smaller analyst forecast errors. In particular, the study
finds that the greater the difference between domestic standards and IAS, the greater are the
forecast errors and that forecast errors tend to be smaller after firms adopt IAS. However,
forecastable earnings are not necessarily of higher quality because, for example, smoothed
earnings are typically more forecastable.
3 See Watts and Zimmerman [1986] for a discussion of the costs and benefits of managerial
discretion in financial reporting.

accordance with U.S. standards, and find that firms claiming to comply with
U.S. standards report accounting amounts that are more similar to U.S.
firms than are those of other non-U.S. firms. However, the characteristics
of the domestic standards-based accounting amounts that non-U.S. firms
assert comply with U.S. standards often differ from those of U.S. firms.
Consistent with Bradshaw and Miller [2007], findings in Lang, Raedy, and
Wilson [2006] suggest that a similar litigation and regulation environment
does not ensure accounting amounts of similar quality. In particular, Lang,
Raedy, and Wilson [2006] find that U.S. standards-based earnings of firms
that cross-list on U.S. markets exhibit significantly more earnings manage-
ment than do earnings of U.S. firms, despite the fact that cross-listed firms
are required to use U.S. standards and, in principle, face a regulatory and
litigation environment similar to U.S. firms.
We could observe differences in accounting quality for firms applying
IAS for reasons other than those relating to the financial reporting system,
such as firms’ incentives and economic environments. Regarding incentives,
because application of IAS is largely voluntary during our sample period,
incentives for firms that adopt IAS could change between the pre- and posta-
doption periods, which would result in their decision to adopt IAS. 4 The
fact that firms might adopt IAS as part of their response to changes in in-
centives could indicate that either their domestic standards do not permit
them to reveal their higher accounting quality or they adopt IAS to signal
their higher accounting quality because they believe the market perceives
IAS are higher quality than domestic standards. Both of these explanations
are consistent with IAS being associated with higher accounting quality. 5
Regarding the economic environment, firms may adopt IAS because they
anticipate IAS will become mandatory in the near future. If this is the case
but application of IAS is not associated with an improvement in accounting
quality, then our tests are biased against finding that IAS-based accounting
amounts are of higher quality. Also, Land and Lang [2002] show that ac-
counting quality is improving worldwide. Therefore, any improvement in
accounting quality we observe after firms adopt IAS could be obtained even
if firms do not adopt IAS. Section 3 discusses the research design features we
incorporate to mitigate the effects on our accounting quality comparisons
arising from changing incentives and other temporal economic changes.
4 Daske et al. [2007] provide evidence that changing incentives can affect not only the
decision to adopt IAS, but also the degree to which firms comply with IAS. In particular, Daske
et al. [2007] examine the economic consequences of adopting IAS, including liquidity and
equity cost of capital. The study’s findings indicate that economic benefits are obtained only for
those firms that can credibly signal a commitment to higher financial statement transparency.
5 Some firms may involuntarily adopt IAS as a consequence of other decisions they make
in response to changes in incentives, for example, the requirement to apply IAS of a stock
exchange on which a firm decides to list securities. Any observed improvement in accounting
quality could be attributable solely to the fact that the new exchange requires IAS, and even if
the firm did not list on the new exchange we might observe an increase in quality under the
firm’s domestic standards. Untabulated findings reveal that eliminating cross-listed firms from
the sample has no effect on our inferences.
2.2 IAS AND DOMESTIC STANDARDS COMPARISONS

Several studies compare accounting amounts based on, and the economic
implications of, applying IAS and domestic standards in Germany. Most of
these studies find no significant differences. Van Tendeloo and Vanstrae-
len [2005] find that German firms applying IAS do not exhibit differences
in earnings management when compared to those applying German stan-
dards. Daske [2006] finds no evidence of a reduction in cost of capital for
German firms that apply IAS. Hung and Subramanyam [2007] find that
accounting amounts based on German standards and those based on IAS
that are disclosed in accordance with requirements for first-time adopters
of IAS do not differ in value relevance. 6 In contrast, Bartov, Goldberg, and
Kim [2005] provide evidence that earnings based on IAS are more value
relevant than earnings based on German standards.
Eccher and Healy [2003] compare accounting amounts based on IAS
and Chinese standards and find that those based on IAS are not more value
relevant than those based on Chinese standards for firms that can be owned
by foreign investors. However, the study finds that accounting amounts based
on IAS are less value relevant than those based on Chinese standards for
firms that can only be owned by domestic investors.
One explanation for the mixed findings in this individual country re-
search is that firms preparing to adopt IAS likely transition gradually, chang-
ing accounting amounts based on domestic standards to be closer to those
based on IAS. For example, Hung and Subramanyam [2007] find few rec-
onciling items related to earnings management, such as hidden reserves,
which is surprising because the existence of such earnings management
items is a common concern with application of German standards. 7 Another
explanation is that developing economies lack the infrastructure to enforce
the application of IAS. Eccher and Healy [2003] posit this as one reason for
6 Leuz [2003] compares measures of information asymmetry, that is, bid-ask spreads and
trading volume, for German firms trading on Germany’s New Market that apply U.S. standards
and those that apply IAS. The sample is comprised primarily of young firms in high technology
industries that trade on the same stock exchange. As a result, the firms face similar economic
environments, incentives, and features of the financial reporting system other than account-
ing standards, which permits Leuz [2003] to attribute differences in information asymmetry
to differences in accounting standards. Leuz [2003] finds little evidence of differences in in-
formation asymmetry for the two groups of firms. Our research question differs in three ways.
First, the Leuz [2003] comparisons relate to firms applying U.S. standards and IAS, whereas our
comparisons relate to firms applying non-U.S. domestic standards and IAS. Second, whereas
we focus on differences in accounting quality, Leuz [2003] focuses on differences in infor-
mation asymmetry, which is affected by a variety of factors in addition to accounting quality.
Third, whereas Leuz [2003] focuses on differences in information asymmetry arising from dif-
ferences in accounting standards, we focus on differences in accounting quality arising from
the financial reporting system comprehensively, of which accounting standards are only one
part.
7 The findings in Lang, Raedy, and Yetman [2003] provide support for this explanation in
the context of firms cross-listing on U.S. exchanges. In particular, the study finds that firms
cross-listing on U.S. exchanges report accounting amounts based on domestic standards that
are close enough to those based on U.S. standards to reduce the number of reconciling items.
not finding that IAS-based accounting amounts have higher value relevance.
A third explanation is that the studies differ in the effectiveness of controls
for incentives associated with a firm’s use of a particular set of accounting
standards and effects of the economic environment. A fourth explanation
is that the studies use different metrics, draw data from somewhat different
time periods, and use different control variables.
Our study differs from this individual country research in the following
ways. First, our sample includes firms from 21 countries. There are advan-
tages and disadvantages associated with focusing on individual countries
relative to using a sample from many countries. For example, focusing on a
particular country removes the need to control for potentially confounding
effects of country-specific factors unrelated to the financial reporting sys-
tem. However, doing so makes it difficult to extrapolate to other countries
inferences from such studies. Second, we use an array of metrics consistently
derived over a single time period. Third, we develop empirical procedures,
including use of a matched sample and multiple regression, to mitigate
the effects on our inferences of factors unrelated to the financial reporting
system, that is, incentives and economic environment.
2.3 MEASURES OF ACCOUNTING QUALITY
Following prior research, we operationalize accounting quality using earn-
ings management, timely loss recognition, and value relevance metrics. Con-
sistent with the predictions in this prior research, we predict that firms with
higher quality earnings exhibit less earnings management, more timely loss
recognition, and higher value relevance of earnings and equity book value.
However, as noted below, there are plausible reasons for making the oppo-
site prediction for several of our metrics. This is because accounting qual-
ity can be affected by opportunistic discretion exercised by managers and
nonopportunistic error in estimating accruals, and our metrics reflect these
effects.
We examine two manifestations of earnings management, earnings
smoothing and managing towards positive earnings. We expect IAS-based
earnings to be less managed than domestic standards-based earnings
because IAS limit management’s discretion to report earnings that are
less reflective of the firm’s economic performance. 8 Regarding earnings
smoothing, following prior research, we assume that firms with less earn-
ings smoothing exhibit more earnings variability (Lang, Raedy, and Yetman
[2003], Leuz, Nanda, and Wysocki [2003], Ball and Shivakumar [2005,
2006], Lang, Raedy, and Wilson [2006]). Thus, we predict that firms apply-
ing IAS exhibit more variable earnings than those applying domestic stan-
dards. Our prediction is supported by several studies. Ewert and Wagenhofer
8 As noted above, discretionary accounting choices can be used to reveal private information
about the firm or can be opportunistic and possibly misleading about the firm’s economic
performance (Watts and Zimmerman [1986]). Our prediction assumes that the limitations on
discretion have a greater effect on opportunistic discretion than on managers’ ability to reveal
private information about the firm.
[2005] show that applying accounting standards that limit management’s

discretion should result in higher variability in accounting earnings. Leuz,
Nanda, and Wysocki [2003] find that earnings smoothing is less pronounced
in common law countries; IAS are based on a conceptual framework sim-
ilar to those of common law countries. Ball and Shivakumar [2005, 2006]
suggest that timely recognition of gains and losses, which is consistent with
higher earnings quality, tends to increase the volatility of earnings relative to
cash flows. To test our prediction, we use two metrics of earnings variability,
variability of change in net income and variability of change in net income
relative to variability of change in cash flow.
Although we predict that firms applying IAS have less earnings manage-
ment and, thus, higher earnings variability, some studies (e.g., Healy [1985])
suggest that, in the case of “big baths,” managers may use discretion in ways
that result in higher earnings variability. Thus, firms applying domestic stan-
dards could have more discretion for this form of earnings management and
thus could exhibit higher earnings variability. Also, higher earnings variabil-
ity could be indicative of lower earnings quality because of error in estimat-
ing accruals. Thus, higher quality accounting can result in lower earnings
variability.
We also assume that firms with more earnings smoothing exhibit a more
negative correlation between accruals and cash flows (Lang, Raedy, and
Yetman [2003], Leuz, Nanda, and Wysocki [2003], Ball and Shivakumar
[2005, 2006], Lang, Raedy, and Wilson [2006]). Land and Lang [2002] and
Myers, Myers, and Skinner [2007], among others, interpret a more negative
correlation as indicating earnings smoothing because managers respond
to poor cash flow outcomes by increasing accruals. Ball and Shivakumar
[2005, 2006] show that timely gain and loss recognition, which is consistent
with higher earnings quality, attenuates the negative correlation between
accruals and current period cash flow. Thus, we predict that firms applying
IAS exhibit a less negative correlation between accruals and cash flows than
those applying domestic standards.
Although we predict that higher quality accounting results in a less nega-
tive correlation between accruals and cash flows, the opposite could be true.
In particular, Dechow [1994] suggests that the proper role of accruals in in-
come measurement is to smooth variability in cash flows and, because accru-
als reverse over time, accruals and cash flows are expected to be negatively
correlated. Thus, firms applying domestic standards could manage earnings
to exhibit a less negative correlation between accruals and cash flows. Also, a
less negative correlation between accruals and cash flows could be indicative
of lower accounting quality because of error in estimating accruals. Thus,
higher quality accounting can result in a more negative correlation between
accruals and cash flows.
Regarding our second manifestation of earnings management, prior
research identifies positive earnings as a common target of earnings
management. Prior research uses the frequency of small positive net in-
come as a metric to provide evidence of managing towards positive earnings
(Burgstahler and Dichev [1997], Leuz, Nanda, and Wysocki [2003]). The
notion underlying this metric is that management prefers to report small
positive net income rather than negative net income. Thus, we predict that
firms applying IAS report small positive net income with lower frequency
than those applying domestic standards.
Turning to timely loss recognition, we expect higher quality earnings ex-
hibit a higher frequency of large losses. This is consistent with Ball, Kothari,
and Robin [2000], Lang, Raedy, and Yetman [2003], Leuz, Nanda, and
Wysocki [2003], Ball and Shivakumar [2005, 2006], and Lang, Raedy, and
Wilson [2006], who suggest that one characteristic of higher quality earnings
is that large losses are recognized as they occur rather than being deferred
to future periods. This characteristic is closely related to earnings smoothing
in that if earnings are smoothed, large losses should be relatively rare. Thus,
we predict that firms applying IAS report large losses with higher frequency
than those applying domestic standards.
Although we predict higher quality accounting results in a higher fre-
quency of larger losses, the opposite could be true. In particular, a higher
frequency of large losses could be indicative of big bath earnings manage-
ment. Also, a higher frequency of large losses could result from error in
estimating accruals. Thus, higher quality accounting can result in a lower
frequency of large losses.
Turning lastly to value relevance, we expect that firms with higher qual-
ity accounting have a higher association between stock prices and earnings
and equity book value because higher quality earnings better reflect a firm’s
underlying economics (Barth, Beaver, and Landsman [2001]). First, higher
quality accounting results from applying accounting standards that require
recognition of amounts that are intended to faithfully represent a firm’s
underlying economics. Second, higher quality accounting is less subject to
opportunistic managerial discretion. These two features of higher quality ac-
counting are linked together by Ewert and Wagenhofer [2005], who show
that accounting standards that limit opportunistic discretion result in ac-
counting earnings that have higher value relevance. Third, higher quality
accounting has less nonopportunistic error in estimating accruals. Consis-
tent with these three features of higher quality accounting, prior empiri-
cal research suggests that higher quality earnings are more value relevant
(Lang, Raedy, and Yetman [2003], Leuz, Nanda, and Wysocki [2003], Lang,
Raedy, and Wilson [2006]). Accordingly, we predict that firms applying IAS
exhibit higher value relevance of net income and equity book value than
firms applying domestic standards. 9
9 Examining value relevance in this context is subject to at least two caveats. First, it presumes
the pricing process is similar across firms and across countries, after we match on or include
controls for firm size, country, and industry. Eccher and Healy [2003] provide evidence that
prices reflect investor clienteles that can differ across firms and countries. Second, earnings
smoothing can increase the association between earnings and share prices. For example, the
presence of large asset impairments is likely to be positively associated with frequency of large
We test whether accounting quality for firms applying IAS is higher than
that for firms applying domestic standards using several metrics relating to
earnings management, timely loss recognition, and value relevance. One
advantage of using several metrics is that, in principle, doing so permits us
to determine the source of any accounting quality differences between firms
that apply IAS and those that do not. Another advantage is that because there
are plausible alternative predictions for some of our metrics, it is possible
to rule these out for some of our metrics based on findings from other
metrics. For example, suppose we find that firms applying IAS have higher
earnings variability and a higher frequency of large losses. These two findings
are consistent with our predictions indicating higher accounting quality.
However, they also are consistent with lower quality accounting resulting
from error in estimating accruals and big bath earnings management. If we
also find that firms applying IAS have higher value relevance than firms that
do not, the error in estimating accruals and big bath earnings management
explanations are ruled out.
3. Research Design
3.1 OVERVIEW
Our empirical metrics of accounting quality reflect the effects attributable
to the financial reporting system as well as those unattributable to the finan-
cial reporting system, including the economic environment and incentives
for firms to adopt IAS. Following prior research, we use two approaches
to mitigate these effects. First, when comparing metrics for firms apply-
ing IAS, IAS firms, and firms applying non-U.S. domestic standards, NIAS
firms, we use a matching procedure to select our sample of NIAS firms. In
particular, we match on country as a control for country-level differences in
economic activity and size as a control for size-related differences, such as
the information environment. Second, when constructing our accounting
quality metrics relating to earnings management and timely loss recognition,
we include controls for factors that prior research identifies as associated
with firms’ voluntary accounting decisions and controls for the economic
environment.
As is the case in prior research (e.g., Ashbaugh [2001], Ashbaugh and
Pincus [2001], Lang, Raedy, and Yetman [2003], Leuz, Nanda, and Wysocki
[2003], Lang, Raedy, and Wilson [2006]), there is no definitive way to de-
termine the degree to which these research design features mitigate the
effects of the economic environment and incentives on our metrics. In ad-
dition, even though we intend for our matching procedure to control for
economic differences and our control variables to capture firms’ incentives
negative net income, but could reduce the value relevance of accounting earnings because
extreme losses tend to have a low correlation with share prices and returns. See Wysocki [2005]
for a discussion of various approaches to assessing accounting quality.
to adopt IAS, each design feature can control for both of these confound-
ing effects. Moreover, these two design features can also control for some
effects attributable to the financial reporting system, such as enforcement
and litigation. That is, matching IAS and NIAS firms and using control vari-
ables when constructing our metrics could mask differences in accounting
quality attributable to the financial reporting system.
To construct the matched sample, consistent with Lang, Raedy, and
Yetman [2003] and Lang, Raedy, and Wilson [2006] but modified to our
context, we first identify each IAS firm’s country and adoption year. We
then identify all firms that do not apply IAS in any sample year that are in
industries that have at least one IAS firm. We select as the matched NIAS
firm the nonapplying firm from the IAS firm’s country whose equity mar-
ket value is closest to the IAS firm’s at the end of its adoption year. Once a
nonapplying firm is selected as a match, it is not considered as a potential
match for other IAS firms. In a few cases, potential matching firms do not
have market value of equity available in the adoption year. In those cases,
we consider market value of equity for the two years before and after the
adoption year. 10 Our analyses include all firm-years for which the IAS firm
and its matched NIAS firm both have data. For example, if the IAS firm
has data from 1994 through 2000, and its matched NIAS firm has data from
1995 through 2002, then our analysis includes data from 1995 through 2000
for the IAS firm and its matched NIAS firm.
As the primary test of our predictions, we compare accounting quality
metrics for IAS firms and NIAS firms in the period after the IAS firms adopt
IAS, that is, the postadoption period. This permits us to determine whether
firms that apply IAS have higher accounting quality than firms that do not.
One potential problem with comparing IAS and NIAS firms in the posta-
doption period is that the two groups of firms could exhibit differences in
accounting quality in the postadoption period because their economic char-
acteristics differ. To determine whether this is the case, we compare IAS and
NIAS firms’ accounting quality before the IAS firms adopt IAS, that is, the
preadoption period. Finding IAS and NIAS firms exhibit similar differences
in accounting quality in the pre- and postadoption periods would make it
difficult to attribute postadoption differences in accounting quality to the
change in financial reporting for IAS firms. Conversely, finding that account-
ing quality for IAS and NIAS firms is similar in the preadoption period but
is different in the postadoption period would make it less likely that differ-
ences in accounting quality in the postadoption period are attributable to
differences in economic characteristics between the two groups of firms.
Next we compare accounting quality for IAS firms in the pre- and posta-
doption periods to determine whether application of IAS is associated with
higher accounting quality for IAS firms. We do this for two reasons. First,
10 We also use other matching procedures, that is, permitting an NIAS firm to be matched
to more than one IAS firm and requiring NIAS firms to have market value of equity in the IAS
firm’s year of adoption. Using these alternative procedures has no effect on our inferences.
this comparison is an alternative approach to determining whether differ-

ences in accounting quality between IAS and NIAS firms in the postadoption
period are attributable to differences in economic characteristics between
the two groups of firms. This is because comparing accounting quality for
IAS firms in the pre- and postadoption periods uses each IAS firm as its
own control. Second, this comparison provides direct evidence on whether
accounting quality for IAS firms improves between the pre- and postadop-
tion periods. Finding that accounting quality for IAS firms is higher in the
postadoption period would make it more likely that the improvement in
accounting quality is attributable to the change in the financial reporting
system.
A limitation of comparing the accounting quality of IAS firms in the pre-
and postadoption periods is that we could detect an improvement in ac-
counting quality because of changes in the economic environment of IAS
firms unattributable to the financial reporting system. The fact that IAS
firms do not adopt IAS in the same calendar year mitigates the potential
effect of changes in the economic environment. Nonetheless, we examine
whether NIAS firms exhibit similar changes in accounting quality between
the two periods to provide additional evidence on whether changes in the
economic environment result in a general change in accounting quality. In
particular, we examine whether the change in accounting quality for IAS
firms between the pre- and postadoption periods is greater than that for
NIAS firms. This question arises in the event that we find that accounting
quality for IAS firms improves from the pre- to postadoption periods, and is
greater than that for NIAS firms in both the pre- and postadoption periods.
In contrast, assume we find that accounting quality for IAS firms improves
from the pre- to postadoption periods and is greater than that for NIAS
firms in the postadoption period, but is not different from that for NIAS
firms in the preadoption period. This set of findings would make a com-
parison of changes in accounting quality differences logically redundant,
and such a comparison potentially could suffer from a loss of power aris-
ing from differencing metrics that have estimation error (Landsman and
Magliolo [1988]). 11
Failure to control for a firm’s incentives to adopt IAS when making com-
parisons of accounting quality between IAS and NIAS firms in the postadop-
tion period and changes in accounting quality for IAS firms between the
pre- and postadoption periods can lead us to infer that the observed differ-
ences in accounting quality are attributable to differences in the financial
reporting system when the quality differences are attributable to the ef-
fects of firms’ incentives. Although we include research design features to
mitigate the effects of incentives, we cannot be sure that our findings are
11 To see why such a comparison is logically redundant, denote the quality of IAS and NIAS
accounting amounts in the preadoption (postadoption) period as I PRE and N PRE (I POST and
N POST ). If I POST > I PRE , I POST > N POST , and I PRE = N PRE , then I POST − I PRE > N POST − N PRE .
attributable to differences in the financial reporting system rather than to

differences in firms’ incentives.
Following prior research (Lang, Raedy, and Yetman [2003], Leuz [2003],
Lang, Raedy, and Wilson [2006]), we construct our accounting quality met-
rics based on cross-sectional data. As with prior research, we interpret differ-
ences in various summary statistics (e.g., variances, correlations, and regres-
sion R 2 values) relating to the metrics between two samples of firms being
compared as evidence of differences in accounting quality. This approach
to comparing accounting quality metrics for two groups of firms assumes
that the metrics for the firms within each group are drawn from the same
distribution, and that the metrics for firms in different groups are poten-
tially drawn from different distributions. To the extent that firms within each
group differ in accounting quality as measured by each metric, the variance
of the metric’s distribution will be larger, thereby making it difficult to detect
significant differences in summary statistics between the groups. 12
With the exception of the tests for the frequency of small positive and
large negative net income, for which we test for significance of regression
coefficients, we test for differences in each metric using a t-test based on
the empirical distribution of the differences. Specifically, for each test, we
first randomly select, with replacement, firm observations that we assign to
one or the other type of firm, depending on the test. For example, when
comparing IAS firms and NIAS firms, we assign firm observations as either
IAS or NIAS firms. We then calculate the difference between the two types
of firms in the metric that is the subject of the particular test. We obtain
the empirical distribution of this difference by repeating this procedure
1,000 times. An advantage of this approach to testing significance of the
differences is that it requires no assumptions about the distribution of each
metric. Another advantage is that it can be used for all of our metrics, even
those with unknown distributions (e.g., the ratio of variability of change in
net income to variability of change in cash flow). 13
3.2 ACCOUNTING QUALITY METRICS
3.2.1. Earnings Management. We use four earnings management
metrics—three for earnings smoothing and one for managing earnings
towards a target. Our first earnings smoothing metric is based on the
variability of the change in net income scaled by total assets, NI (Lang,
12 An alternative approach, used in some prior research (Dechow [1994], Leuz, Nanda, and
Wysocki [2003]), is to base comparisons on alternative metrics constructed using a time series
of firm-specific data. Data limitations preclude this approach because it requires a time series
of observations for each firm that is not overlapping for the pre- and postadoption periods.
Even if this approach were feasible, it is unclear whether this approach would result in more
reliable inferences because firm-specific metrics would likely be based on a small number of
observations, limiting power and introducing estimation error. The approach also requires
assuming the intertemporal stationarity of each metric.
13 When applicable, we also test for significance using the Cramer [1987] test. In every case,
that test results in the same inferences as the empirical distribution test.
Raedy, and Wilson [2006]). 14 We interpret a smaller variance of the change

in net income as evidence of earnings smoothing. However, change in
net income is likely to be sensitive to a variety of factors unattributable
to the financial reporting system, that is, the economic environment
and incentives to adopt IAS. Although our matching procedure mit-
igates the confounding effects of some of these factors, other effects
likely remain. Thus, following Lang, Raedy, and Yetman [2003] and
Lang, Raedy, and Wilson [2006], our earnings variability metric is the
variance of the residuals from the regression of change in net income
on variables identified in prior research as controls for these factors
(Ashbaugh [2001], Pagano, Röell, and Zechner [2002], Lang, Raedy, and
Yetman [2003], Tarca [2004], Lang, Raedy, and Wilson [2006]), NI ∗ : 15
NI it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it
+ α5 DISSUE it + α6 TURN it + α7 CF it + α8 AUD it + α9 NUMEX it
+ α10 XLIST it + α11 CLOSE it + εit . (1)

where:
SIZE = the natural logarithm of end of year market value of equity;
GROWTH = percentage change in sales;
EISSUE = percentage change in common stock;
LEV = end of year total liabilities divided by end of year equity book
value;
DISSUE = percentage change in total liabilities;
TURN = sales divided by end of year total assets;
CF = annual net cash flow from operating activities divided by end
of year total assets;
AUD = an indicator variable that equals one if the firm’s auditor
is PwC, KPMG, Arthur Andersen, E&Y, or D&T, and zero
otherwise;
14 DataStream provides several definitions of operating income. The one we use does not
include extraordinary items and other nonoperating income. However, because the criterion
for extraordinary items differs across countries and excluding extraordinary items could result
in differences based on the location on the income statement of one-time items, we replicate
the analysis including extraordinary and nonoperating items. Using these alternative income
measures has no effect on our inferences.
15 Basing our inferences on the variance of residuals from equation (1) assumes that in-
clusion of the control variables effectively results in a measure of variability of change in net
income that is unrelated to the controls. A more direct approach is to first compute variability
of change in net income, and then use it as the dependent variable in equation (1). However,
this approach is not feasible because it requires sufficient time series of firm-specific data to
estimate variability of change in net income (see also footnote 12). Therefore, we cannot be
sure that our approach effectively eliminates firm-specific differences in our accounting quality
metrics.
NUMEX = the number of exchanges on which a firm’s stock is listed;

XLIST = an indicator variable that equals one if the firm is listed on
any U.S. stock exchange and WorldScope indicates that the
U.S. exchange is not the firm’s primary exchange;
CLOSE = the percentage of closely held shares of the firm as reported
by WorldScope. 16
Equation (1) also includes country and industry fixed effects, as do equations
(2) through (8). 17
We estimate equation (1) pooling observations that are relevant to the
particular comparison we test. For example, when comparing IAS and NIAS
firms in the postadoption period, we pool all sample years in the postadop-
tion period. For this comparison, the variability of NI ∗ is the variance
of the IAS and NIAS firms’ respective residuals from equation (1) in the
postadoption period. When comparing IAS firms in the post- and preadop-
tion periods, we pool all sample years for IAS firms. For this comparison,
the variability of NI ∗ is the respective variance of residuals for IAS firms
in the post- and preadoption periods. We compute the difference in the
variability of NI ∗ between the post- and preadoption periods for IAS and
NIAS firms as the difference between the resulting metrics for IAS and NIAS
firms.
Our second earnings smoothing metric is based on the mean ratio of
the variability of the change in net income, NI , to the variability of the
change in operating cash flows, CF . Firms with more volatile cash flows
typically have more volatile net income, and our second metric attempts to
control for this. If firms use accruals to manage earnings, the variability of
the change in net income should be lower than that of operating cash flows.
As with NI , CF is likely to be sensitive to a variety of factors unattributable
to the financial reporting system. Therefore, we also estimate an equation
similar to equation (1), but with CF as the dependent variable:
CF it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it
+ α5 DISSUE it + α6 TURN it + α7 CF it + α8 AUD it + α9 NUMEX it
+ α10 XLIST it + α11 CLOSE it + εit (2)

As with equation (1), we pool observations appropriate for the particular
comparison. 18 The variability of CF ∗ is the variance of groups of residuals
16 Excluding these controls from our tests has no effect on our inferences.
17 Our design detects differences between groups of firms in earnings smoothing, as mea-
sured by residual earnings variability, provided that the mean level of the residuals from equa-
tion (1) does not differ significantly between the two groups of firms. For all relevant com-
parisons of earnings variability, untabulated statistics reveal no significant differences in mean
residuals for each group. In addition, the frequency with which the test observation’s residual
exceeds that of its matched control yields the same inference.
18 For ease of exposition, we use the same notation for coefficients and error terms in each
equation. In all likelihood they differ.

from equation (2), where the composition of the groups depends on the
particular comparison we test. Our resulting second metric is the ratio of
the variability of NI ∗ to variability of CF ∗ .
Our third earnings smoothing metric is based on the Spearman corre-
lation between accruals and cash flows. As with the two variability metrics
based on equations (1) and (2), we compare correlations of residuals from
equations (3) and (4), CF ∗ and ACC ∗ , rather than correlations between
CF and ACC directly. ACC is NI minus CF . As with the equations (1) and
(2), both CF and ACC are regressed on the control variables, but excluding
CF :
CF it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it
+ α5 DISSUE it + α6 TURN it + α7 AUD it + α8 NUMEX it
ACC it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it
+ α5 DISSUE it + α6 TURN it + α7 AUD it + α8 NUMEX it
Our metric for managing towards positive earnings is the coefficient on

small positive net income, SPOS, in the regressions given by equations (5)
and (6). When comparing IAS firms and NIAS firms in the postadoption
(preadoption) period, we estimate equation (5) pooling observations from
the postadoption (preadoption) period.
IAS(0, 1)it = α0 + α1 SPOS it + α2 SIZE it + α3 GROWTH it + α4 EISSUE it
+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUDit
+ α10 NUMEX it + α11 XLISTit + α12 CLOSE it + εit (5)
IAS(0,1) is an indicator variable that equals one for IAS firms and zero
for NIAS firms, and SPOS is an indicator variable that equals one if net
income scaled by total assets is between 0 and 0.01 (Lang, Raedy, and
Yetman [2003]). A negative coefficient on SPOS indicates that NIAS firms
manage earnings toward small positive amounts more frequently than do
IAS firms. We base our inferences on the coefficient on SPOS from equa-
tion (5) rather than directly comparing the IAS and NIAS firms’ per-
centages of small positive income because the SPOS coefficient reflects
the effects of controls for factors unattributable to the financial reporting
system.
When comparing IAS firms in the postadoption and preadoption periods,
we estimate equation (6) pooling IAS firm observations from all sample
years.
POST (0, 1)it = α0 + α1 SPOS it + α2 SIZE it + α3 GROWTH it + α4 EISSUE it
+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUD it
+ α10 NUMEX it + α11 XLIST it + α12 CLOSE it + εit (6)

POST (0,1) is an indicator variable that equals one for observations in the
postadoption period and zero otherwise. A negative coefficient on SPOS
indicates that IAS firms manage earnings toward small positive amounts
more frequently in the preadoption period than they do in the postadoption
period. 19
3.2.2. Timely Loss Recognition. We measure timely loss recognition as the

coefficient on large negative net income, LNEG, in the regressions given by
equations (7) and (8) (Lang, Raedy, and Yetman [2003], Lang, Raedy, and
Wilson [2006]). When comparing IAS firms and NIAS firms in the postadop-
tion (preadoption) period, we estimate equation (7) pooling observations
from the postadoption (preadoption) period.
IAS(0, 1)it = α0 + α1 LNEG it + α2 SIZE it + α3 GROWTH it + α4 EISSUE it

LNEG is an indicator variable that equals one for observations for which
annual net income scaled by total assets is less than −0.20, and zero other-
wise. A positive coefficient on LNEG indicates that IAS firms recognize large
losses more frequently than NIAS firms. As with equation (5), we use the
coefficient on LNEG from equation (7) rather than directly comparing IAS
and NIAS firms’ frequencies of large losses to assess whether IAS firms are
less likely to manage earnings.
When comparing IAS firms in the postadoption and preadoption periods,
we estimate equation (8) pooling IAS firm observations from all sample
years.
POST (0, 1)it = α0 + α1 LNEG it + α2 SIZE it + α3 GROWTH it + α4 EISSUE it

A positive coefficient on LNEG indicates that IAS firms recognize large losses
more frequently in the postadoption period than they do in the preadoption
period.
19 Following Lang, Raedy, and Wilson [2006], in the analyses of small positive and large
negative net income, we report results from ordinary least squares estimation rather than from
logit estimation because Greene [1993] reports that logit models are extremely sensitive to the
effects of heteroskedasticity.
3.2.3. Value Relevance. The first value relevance metric is based on the ex-
planatory power from a regression of stock price on net income and equity
book value. To obtain a measure of price that is unaffected by mean differ-
ences across countries and industries, which could affect our comparisons
of explanatory power, we first regress stock price, P , on country and industry
fixed effects. 20 We regress the residuals from this regression, P ∗ , on equity
book value per share, BVEPS, and net income per share, NIPS, separately
for IAS and NIAS firms in both the post- and preadoption periods, that is,
we estimate four regressions.
Following prior research, to ensure accounting information is in the pub-
lic domain, we measure P six months after fiscal year-end (Lang, Raedy,
and Yetman [2003], Lang, Raedy, and Wilson [2006]). Our first value
relevance metric is the adjusted R 2 value from the regression given by
equation (9).
Pit∗ = β0 + β1 BVEPS it + β2 NIPS it + εit (9)
Our second and third value relevance metrics are based on the explana-
tory power from regressions of net income per share on annual stock return.
Ball, Kothari, and Robin [2000] predict that accounting quality differences
are most pronounced for “bad news” because when firms have “good news”
they have less incentive to manage earnings. Thus, we estimate the earnings-
returns relation separately for positive and negative return subsamples. Be-
cause we partition firms based on the sign of the return, we estimate two
“reverse” regressions with net income as the dependent variable, where one
is for good news firms and the other is for bad news firms. As with the first
value relevance metric, to obtain good and bad news value relevance metrics
that are unaffected by mean differences across countries and industries, we
first regress net income per share divided by beginning of year price, NI /P ,
on country and industry fixed effects. We regress the residuals from this
regression, [NI /P ]∗ , on annual stock return, RETURN . Following Lang,
Raedy, and Wilson [2006], we measure RETURN as the natural logarithm
of the ratio of the stock price three months after fiscal year-end to the stock
price nine months before fiscal year-end, adjusted for dividends and stock
splits. Our second and third value relevance metrics are the R 2 values from
the regression given by equation (10) estimated for good news and bad news
firms. 21
[NI /P ]∗it = β0 + β1 RETURN it + εit (10)
20 In principle, we could permit the BVEPS and NIPS coefficients to reflect cross-industry
differences in the relation between price and accounting amounts (Barth, Konchitchki, and
Landsman [2007]). However, small sample sizes in many of our industries make this impractical.
We do not permit the BVEPS and NIPS coefficients to vary by country because, as with all other
metric comparisons, we match on country when selecting the NIAS firms.
21 Because RETURN is the natural logarithm of a price ratio and therefore can be negative
even when stock prices increase during the 12-month window, when determining whether an
observation belongs in the good news or bad news regression, we measure return as the stock
price three months after fiscal year-end relative to the stock price nine months before fiscal
year end, adjusted for dividends and stock splits.
As with equation (9), we estimate equation (10) separately for IAS and NIAS
firms in both the post- and preadoption periods.
4. Data
Our sample comprises 1,896 firm-year observations for 327 firms that
adopted IAS between 1994 and 2003 for which DataStream data are avail-
able from 1990 through 2003. Obtaining data beginning in 1990 provides
us with a minimum of four years of preadoption period data. We obtain our
sample of IAS firms from WorldScope, which identifies the set of account-
ing standards a firm uses to prepare its financial statements. 22 We gather
financial and accounting data from DataStream. The sample size reflects
our having winsorized at the 5% level all variables used to construct our
metrics to mitigate the effects of outliers on our inferences.
Table 1, panel A, presents the country breakdown of our sample. In gen-
eral, the sample is from many countries, with greatest representation from
Switzerland, China, and Germany. 23 Panel B of table 1 presents the sample
industry breakdown. The sample comprises a range of industries, with most
in manufacturing, finance, insurance and real estate, or services. Panel C
of table 1 presents a sample breakdown by IAS adoption year, and reveals
variation across years.
Table 2 presents descriptive statistics relating to variables used in our
analyses. Table 2 reveals that IAS firms have significantly fewer incidents of
small positive earnings and insignificantly more incidents of large negative
earnings than do NIAS firms. 24 Although these descriptive statistics do not
control for other factors, they suggest that IAS firms are less likely than NIAS
firms to manage earnings towards a target and more likely to recognize losses
in a timely manner. In terms of control variables, although IAS firms have
higher growth than do NIAS firms, the difference is not significant. Despite
the size match, IAS firms are significantly larger than NIAS firms. Further,
there is some evidence that IAS firms are more likely to issue debt (mean but
not median difference is significant), more likely to issue equity (median
22 In particular, the two WorldScope standards categories that we code as IAS based on
the WorldScope Accounting Standards Applied data field are “international standards” and
“IASC.” Daske et al. [2007] report that this data field in WorldScope has classification error.
However, any classification error in our study biases against finding differences in accounting
quality in each of our comparisons.
23 Our sample of Chinese and German firms includes some firms that are required to apply
IAS. These include Chinese B share firms and German New Market firms. We perform all of
our comparisons omitting these firms. None of the inferences differs from those obtained from
the tabulated results. The table 1, panel A country classification includes firms from the listed
country that are incorporated offshore, for example, in Bermuda. The offshore incorporation
permits these firms to use IAS rather than domestic standards. For example, four U.K. firms
are headquartered and operate in the United Kingdom, but are incorporated in Bermuda.
24 With the exception of the descriptive statistics in table 2 for which statistical significance
is assessed using a two-sided alternative, throughout we use a 5% significance level to assess

statistical significance based on a one-sided alternative.
TABLE 1
Descriptive Statistics Relating to Application of IAS
Number of Percentage of
Firm-Year Firm-Year Number of Percentage of
Observations Observations IAS Firms IAS Firms
Panel A: Country breakdown
Australia 2 0.11 1 0.31
Austria 111 5.85 17 5.20
Belgium 23 1.21 5 1.53
China 430 22.68 90 27.52
Czech Republic 8 0.42 2 0.61
Denmark 28 1.48 4 1.22
Finland 37 1.95 3 0.92
Germany 340 17.93 65 19.88
Greece 12 0.63 2 0.61
Hong Kong 53 2.80 10 3.06
Hungary 59 3.11 10 3.06
Poland 4 0.21 1 0.31
Portugal 6 0.32 1 0.31
Russian Federation 2 0.11 2 0.61
Singapore 27 1.42 8 2.45
South Africa 66 3.48 8 2.45
Spain 3 0.16 1 0.31
Sweden 3 0.16 1 0.31
Switzerland 594 31.33 79 24.16
Turkey 84 4.43 16 4.89
United Kingdom 4 0.21 1 0.31
Total 1,896 100.00 327 100.00
Panel B: Industry breakdown

Agriculture, forestry and fishing 3 0.16 1 0.31
Mining 124 6.54 21 6.42
Construction 147 7.75 20 6.12
Manufacturing 959 50.58 156 47.71
Utilities 107 5.64 18 5.51
Retail trade 55 2.90 8 2.45
Finance, insurance and real estate 296 15.61 51 15.60
Services 185 9.76 48 14.68
Public administration 20 1.05 4 1.22
Total 1,896 100.00 327 100.00
Panel C: Year breakdown

1994 278 14.66 24 7.34
1995 127 6.70 16 4.89
1996 110 5.80 17 5.20
1997 187 9.86 30 9.17
1998 197 10.39 29 8.87
1999 275 14.50 60 18.35
2000 349 18.41 76 23.24
2001 149 7.86 28 8.56
2002 110 5.80 24 7.34
2003 114 6.01 23 7.03
Total 1,896 100.00 327 100.00
Sample of firms that adopted International Accounting Standards (IAS) between 1994 and 2003.
TABLE 2
Descriptive Statistics Relating to Variables Used in Analyses
IAS (N = 1,896) NIAS (N = 1,896)
Standard Standard
Mean Median Deviation Mean Median Deviation
Test variables
NI 0.00 0.00 0.06 −0.00 0.00 0.06
CF 0.01 0.01 0.07 0.00 0.00 0.07
ACC −0.04 −0.04 0.06 −0.04∗ −0.03∗ 0.06
CF 0.07 0.07 0.07 0.07∗ 0.06∗ 0.07
SPOS 0.13 0.00 0.34 0.17∗ 0.00∗ 0.37
LNEG 0.03 0.00 0.16 0.02 0.00 0.14
RETURN 0.02 0.00 0.41 0.02 0.02 0.39
NI /P 0.08 0.06 0.16 0.08 0.06 0.16
P 1.14 1.00 0.58 1.11 1.00 0.54
BVEPS 0.27 0.13 0.42 0.30 0.13 0.44
NIPS 0.06 0.05 0.12 0.05 0.05 0.11
Control variables
LEV 3.01 1.44 4.64 3.60∗ 1.55 5.33
GROWTH 0.18 0.07 0.51 0.15 0.06 0.48
EISSUE 0.17 0.07 0.50 0.15 0.05∗ 0.49
DISSUE 0.22 0.06 0.94 0.18 0.06 0.63
TURN 0.79 0.73 0.53 0.77 0.67∗ 0.55
SIZE 12.05 12.12 1.63 11.58∗ 11.60∗ 1.63
CF 0.07 0.07 0.07 0.07 0.06 0.07
NUMEX 2.13 2.00 1.45 2.00∗ 2.00∗ 1.44
AUD 0.78 1.00 0.42 0.68∗ 1.00∗ 0.47
XLIST 0.06 0.00 0.24 0.03∗ 0.00∗ 0.18
CLOSE 46.02 46.11 27.03 54.53∗ 56.54∗ 24.87
Sample of firms that adopted International Accounting Standards (IAS) between 1994 and 2003 (IAS
firms) and matched sample of firms that did not (NIAS firms). Tabulated statistics are from the years after
IAS firms adopted IAS, that is, the postadoption period, which ends in 2003.
NI is the change in annual earnings, where earnings is scaled by end-of-year total assets; CF is the
change in annual net cash flow, CF , where cash flow is scaled by end-of-year total assets; ACC is earnings
less cash flow from operating activities, scaled by end-of-year total assets; CF is annual net cash flow from
operating activities, scaled by end-of-year total assets; SPOS is an indicator that equals 1 for observations
with annual earnings scaled by total assets between 0.00 and 0.01; LNEG is an indicator that equals 1 for
observations with annual earnings scaled by total assets less than −0.20; RETURN is annual stock return
from nine months prior to three months after the firm’s fiscal year-end; P is price as of six months after
fiscal year-end; NI /P is earnings per share scaled by beginning of year price; BVEPS is book value of equity
per share; NIPS is net income per share.
LEV is end-of-year total liabilities divided by end-of-year book value of equity; GROWTH is annual
percentage change in sales; EISSUE is annual percentage change in common stock; DISSUE is annual
percentage change in total liabilities; TURN is sales divided by end-of-year total assets; SIZE is the natural
logarithm of market value of equity in millions of dollars as of the end of the year; NUMEX is number
of exchange listings; AUD is an indicator that equals 1 if the auditor is one of the large international
accounting firms; XLIST is an indicator that equals 1 if the firm is listed on any U.S. stock exchange and
WorldScope indicates that the U.S. exchange is not the primary exchange; CLOSE is the percentage of
closely held shares as reported by WorldScope.
∗
indicates significantly different from IAS and NIAS at the 5% level, respectively (two-tailed).
but not mean difference is significant), and are less highly levered (mean
but not median difference is significant). Relating to the last four control
variables, on average, IAS firms trade on more exchanges than NIAS firms,
are more likely to be audited by one of the large auditing firms, are more
likely to list on a U.S. stock exchange, and have a smaller percentage of

closely held shares. All of these differences are significant.
5. Results
5.1 POSTADOPTION PERIOD
Table 3 presents results comparing the quality of accounting amounts
for IAS and NIAS firms in the postadoption period. It reveals that firms
applying IAS generally evidence less earnings management, more timely
loss recognition, and more value relevance of accounting amounts than do
firms not applying IAS.
The first finding relating to earnings management indicates that IAS
firms exhibit a significantly higher variability of change in net income,
TABLE 3
Comparison of IAS and NIAS Firms’ Accounting Quality in the Period after IAS Firms Adopt IAS
Earnings management IAS NIAS
Metric Prediction (N = 1,310) (N = 1,310)
Variability of NI ∗ IAS > NIAS 0.0026 0.0021†
Variability of NI ∗ over CF ∗ IAS > NIAS 1.1084 1.0367
Correlation of ACC ∗ and CF ∗ IAS > NIAS −0.5437 −0.5618†
Small positive NI (SPOS) − −0.0438
Timely loss recognition
Metric
Large negative NI (LNEG) + 0.1323‡
Value relevance
Regression adjusted R 2
Price IAS > NIAS 0.4010 0.3016†
Good news IAS > NIAS 0.0388 0.0001
Bad news IAS > NIAS 0.0621 0.0739
firms) and matched sample of firms that did not (NIAS firms). The periods after IAS firms adopted IAS,
that is, the postadoption period, ends in 2003.
We base the analysis on industry and country fixed-effect regressions including controls as defined in
table 2. We define variability of NI ∗ (CF ∗ ) as the variance of residuals from a regression of the NI
(CF ) on the control variables, and the variability of NI ∗ over CF ∗ as the ratio of the variability of NI ∗
divided by the variability of CF ∗ . Correlation of ACC ∗ and CF ∗ is the partial Spearman correlation between
the residuals from the ACC and CF regressions; we compute both sets of residuals from a regression of each
variable on the control variables. NI, CF , ACC, and CF are defined in table 2.
We regress an indicator variable that equals 1 for IAS firms and 0 for NIAS firms on SPOS (LNEG) and
control variables. SPOS (LNEG) is an indicator that equals 1 when annual net income scaled by total assets is
between 0 and 0.01 (less than −0.20) and 0 otherwise; the coefficient on the indicator variable is tabulated.
The price regression is based on a two-stage regression. In the first stage, P is regressed on industry
and country fixed-effect indicator variables, where P is price as of six months after the fiscal year-end. The
second stage regression is P ∗ = β 0 + β 1 BVEPS + β 2 NIPS + ε, where P ∗ is the residual from the first-stage
regression, BVEPS is book value of equity per share, and NIPS is net income per share. The good/bad news
regression is based on a two-stage regression. In the first stage, NI /P is regressed on industry and country
fixed-effect indicator variables. The second stage regression is [NI/P ]∗ = β 1 RETURN + ε, where [NI/P ]∗
is the residual from the first-stage regression, and RETURN is stock return computed over the 12 months
ending 3 months after year-end. Good (bad) news observations are those for which RETURN is nonnegative
(negative). Adjusted R 2 is from the second-stage regressions.
†indicates significant difference between IAS and NIAS firms at the 5% level (one-sided).
‡indicates significantly different from zero at the 5% level (one-sided).
NI ∗ , 0.0026 versus 0.0021. This difference of residual variances of

0.0005 represents 14% of the total variance of the change in net in-
come, NI (0.0005/0.062 ), and approximately 21% of the residual variance
(0.0005/0.00235), using the midpoint between the two residual variances. 25
The second finding is consistent with the first in that it indicates that the ra-
tio of the variance of change in net income, NI ∗ , to the variance of change
in cash flow, CF ∗ , is higher for IAS firms than for NIAS firms, although
the difference is not significant. In particular, the ratios are 1.1084 and
1.0367 for IAS and NIAS firms, respectively, suggesting that the difference
in net income variability is not solely a result of a difference in cash flow
variability. Consistent with the first two metrics, the third finding indicates
that the correlation between accruals, ACC ∗ , and cash flow, CF ∗ , for IAS
firms, −0.5437, is significantly less negative than for NIAS firms, −0.5618.
This finding indicates that IAS firms smooth earnings less than NIAS firms.
Finally, the coefficient on SPOS, −0.0438, is negative, although not signif-
icantly so, which suggests that NIAS firms more frequently report small
positive earnings, consistent with managing earnings towards an earnings
target.
The next finding in table 3 relates to timely loss recognition. The signif-
icantly positive coefficient on LNEG, 0.1323, indicates that, incremental to
effects associated with our control variables, IAS firms recognize large losses
more frequently than NIAS firms. This finding suggests that, relative to IAS
firms, NIAS firms smooth earnings by delaying the effects of large negative
outcomes. In particular, one interpretation of the results relating to SPOS
and LNEG taken together is that managers of NIAS firms smooth away from
large negative earnings and toward small positive net income, resulting in
less timely recognition of losses.
The final set of findings in table 3 relates to the value relevance of account-
ing amounts. First, regressions of price on net income and equity book value
for IAS and NIAS firms reveal that the R 2 value for IAS firms is significantly
greater than that for NIAS firms, 40.10% versus 30.16%. Untabulated re-
gression summary statistics indicate that, as expected, the coefficients on
net income and equity book value are significantly positive for both IAS and
NIAS firms, and that both coefficients are smaller for NIAS firms. Consis-
tent with predictions, the R 2 value for good news IAS firms is greater than
that for good news NIAS firms (3.88% vs. 0.01%). Contrary to predictions,
the R 2 value for bad news IAS firms is lower than that for bad news NIAS
firms (6.21% vs. 7.39%). However, for both comparisons, the difference is
25 Although the order of magnitude of the residual variances is similar to that in Lang,
Raedy, and Wilson [2006], the variances are not directly comparable between the two studies
because our change in net income regression includes four additional control variables not
included in the prior study – AUD, NUMEX , XLIST , and CLOSE. Untabulated results indicate
that each of the four variables provides incremental explanatory power to the model, thereby
reducing unexplained variance.
TABLE 4
Comparison of IAS and NIAS Firms’ Accounting Quality in the Period before IAS Firms Adopt IAS
Earnings management IAS NIAS
Metric (N = 587) (N = 587)
Variability of NI ∗ 0.0016 0.0018
Variability of NI ∗ over CF ∗ 0.6194 0.6661
Correlation of ACC ∗ and CF ∗ −0.6073 −0.5726
Small positive NI (SPOS) −0.0713
Metric
Large negative NI (LNEG) 0.3094‡
Value relevance
Price 0.2803 0.2718
Good news 0.0224 0.0299
Bad news 0.0464 0.0184
firms) and matched sample of firms that did not (NIAS firms). The period before IAS firms adopted IAS,
that is, the preadoption period, begins in 1990.
second-stage regression is P ∗ = β 0 + β 1 BVEPS + β 2 NIPS + ε, where P ∗ is the residual from the first-stage
fixed-effect indicator variables. The second-stage regression is [NI /P ]∗ = β 0 + β 1 RETURN + ε, where
[NI /P ]∗ is the residual from the first-stage regression, and RETURN is stock return computed over the 12
months ending 3 months after year-end. Good (bad) news observations are those for which RETURN is
nonnegative (negative). Adjusted R 2 is from the second-stage regressions.
‡ indicates significantly different from zero at the 5% level (one-sided).
not significant. 26 Thus, although the price regression findings indicate that
accounting amounts are more value relevant for IAS than NIAS firms, the
returns regression findings do not.
5.2 PREADOPTION PERIOD

Table 4 presents findings for earnings management, timely loss recog-
nition, and value relevance for IAS and NIAS firms in the preadoption
period. It reveals that, with the exception of timely loss recognition, IAS
and NIAS firms exhibit no significant differences in accounting quality in
26 The fact that we do not find significantly greater explanatory power for bad news IAS firms
is somewhat surprising given previous evidence on timely loss recognition (Ball, Robin, and
Wu [2003]). The finding is also contrary to our finding that IAS firms have a greater frequency
of large negative net income than NIAS firms.
the preadoption period. Thus, differences in accounting quality between

IAS and NIAS firms in the preadoption period generally do not explain
postadoption period differences.
The first finding relating to earnings management suggests that in the
preadoption period IAS firms exhibit a lower variance of the change in
net income, NI ∗ , than do NIAS firms, 0.0016 versus 0.0018. Although
this difference is not significant, this finding contrasts with that from the
postadoption period in which IAS firms have a significantly higher variance
of NI ∗ . These results indicate that the higher NI ∗ variance for IAS firms
in table 3 in the postadoption period is not a result of a higher NI ∗ variance
for IAS firms in the preadoption period. The second finding indicates that
the ratio of the variance of change in net income, NI ∗ , to the variance
of the change in cash flow, CF ∗ , is insignificantly higher for NIAS firms
than for IAS firms, 0.6661 versus 0.6194. This result suggests that IAS firms
evidence more earnings smoothing than NIAS firms in the preadoption
period. This finding also contrasts with the finding for the postadoption
period, in which NIAS firms have an insignificantly lower ratio of the two
variances. The third finding indicates that the correlation between accruals,
ACC ∗ , and cash flow, CF ∗ , is insignificantly more negative for IAS firms than
for NIAS firms, −0.6073 versus −0.5726. This finding also contrasts with the
finding for the postadoption period, in which IAS firms have a significantly
less negative correlation between accruals and cash flows.
Finally, the coefficient on SPOS, −0.0713, is insignificantly different from
zero in the preadoption period, which suggests that NIAS and IAS firms
report small positive net income with frequencies that do not differ in the
preadoption period. However, unlike the findings for the first three metrics,
in which there is suggestive evidence that IAS firms have lower accounting
quality in the preadoption period and higher quality in the postadoption
period, there is no such reversal for the SPOS coefficient between the two
periods.
The next finding in table 4 relates to timely loss recognition. It indicates
that the LNEG coefficient, 0.3094, is significantly larger for IAS firms than
for NIAS firms. This result indicates that IAS firms recognize losses more
frequently even in the preadoption period. Thus, differences in accounting
quality as reflected in our timely loss recognition metric in the postadop-
tion period could be attributable to differences in economic characteristics
between the two groups of firms.
The final set of findings in table 4 relates to value relevance. Regressions
of price on net income and equity book value for IAS and NIAS firms reveal
that the R 2 value for IAS firms is insignificantly larger than that for NIAS
firms, 28.03% versus 27.18%, in the preadoption period. In the postadoption
period, this R 2 value is significantly larger for IAS firms. These findings
indicate that the higher value relevance for IAS firms as evidenced by the
price regressions in the postadoption period is not attributable to higher
value relevance in the preadoption period. The R 2 value from a regression
of net income on returns for good (bad) news IAS firms, 2.24% (4.64%), is
insignificantly smaller (larger) than that for good (bad) news NIAS firms,
2.99% (1.84%). As in the postadoption period, these findings suggest that
there are no value relevance differences between IAS and NIAS firms in the
preadoption period as evidenced by the good and bad news regressions.
5.3 COMPARISON OF POST- AND PREADOPTION PERIODS FOR IAS FIRMS

Overall, results for the preadoption period provide little evidence that dif-
ferences in accounting quality in the postadoption period are attributable to
differences in economic characteristics between IAS and NIAS firms. Table 5
presents a comparison of our quality metrics for IAS firms before and after
they adopt IAS. 27 Tests for all metrics are consistent with improvements in
accounting quality with application of IAS, with four of the eight differences
being significant.
Table 5 reveals that variability of change in net income increases signifi-
cantly from 0.0017 to 0.0024, and variability of change in net income relative
to that of cash flow also increases significantly, from 0.7442 to 0.9900. The
correlation between accruals and cash flows after adoption, −0.5445, is less
negative than before adoption, −0.5726, but insignificantly so. Similarly,
as indicated by the SPOS coefficient of −0.0640, the frequency of small
positive net income decreases after adoption, although this decrease is in-
significant. Regarding timely loss recognition, as indicated by the significant
LNEG coefficient of 0.1536, the frequency of large negative net income is
significantly higher postadoption than preadoption. The R 2 values from
the price regressions and from the good and bad news returns regressions
also increase from 28.20%, 2.24%, and 4.64% in the preadoption period
to 40.10%, 3.88%, and 6.21% in the postadoption period, respectively, al-
though the increase is significant only for the price regression.
5.4 DIFFERENCE IN CHANGES FOR IAS AND NIAS FIRMS

Our final analysis examines whether change in accounting quality for IAS
firms between the pre- and postadoption periods is greater than that for
NIAS firms. However as section 3.1 explains, the tables 3, 4, and 5 findings
make comparison of changes in accounting quality differences logically re-
dundant. This is because the findings indicate that accounting quality for
IAS firms improves from the pre- to postadoption periods and is greater
than that for NIAS firms in the postadoption period, but is not different
from that for NIAS firms in the preadoption period.
27 Although this analysis has the advantage of using each firm as its own control, three
caveats apply. First, because there are different numbers of pre- and postadoption years for
firms in our sample, the pre- and postadoption panels are unbalanced in terms of number of
observations. Second, if firms transition gradually to IAS, some of the observations before and
after adoption are confounded, potentially weakening our results. Third, some of the effects of
IAS also could manifest in NIAS firms because of, for example, domestic standards changing
to be more similar to IAS, potentially understating the differences between accounting quality
for IAS and NIAS firms.
TABLE 5
Comparison of IAS Firms’ Accounting Quality before and after They Adopt IAS
Earnings management Pre Post
Metric Prediction (N = 587) (N = 1,310)
Variability of NI ∗ Post > Pre 0.0017 0.0024†
Variability of NI ∗ over CF ∗ Post > Pre 0.7442 0.9900†
Correlation of ACC ∗ and CF ∗ Post > Pre −0.5726 −0.5445
Small positive NI (SPOS) − −0.0640
Metric
Large negative NI (LNEG) + 0.1536‡
Value relevance
Price Post > Pre 0.2820 0.4010†
Good news Post > Pre 0.0224 0.0388
Bad news Post > Pre 0.0464 0.0621
firms) and matched sample of firms that did not (NIAS firms). The period before IAS firms adopt IAS, that
is, the preadoption period, begins in 1990. The period after IAS firms adopt IAS, that is, the postadoption
period, ends in 2003.
We regress an indicator variable that equals 1 for IAS firms and 0 for NIAS firms on SPOS (LNEG)
and control variables. SPOS (LNEG) is an indicator that equals 1 when annual net income scaled by total
assets is between 0 and 0.01 (less than −0.20) and 0 otherwise; the coefficient on the indicator variable is
tabulated.
fixed-effect indicator variables. The second stage regression is [NI /P ]∗ = β 0 + β 1 RETURN + ε, where
† indicates significant difference between the pre- and postadoption periods at the 5% level (one-sided).
‡ indicates significantly different from zero at the 5% level (one-sided).
The results in table 6 generally suggest that IAS firms experience a greater
improvement in accounting quality than do NIAS firms between the pre- and
postadoption periods. Differences in changes for three of the four earnings
management metrics and two of the three R 2 metrics are in the predicted
direction, although only the difference in changes for the variability of NI ∗
is significant. Managing to a target, timely loss recognition, and bad news
R 2 differences in change results are contrary to predictions, although none
of these differences is significant. Also, as explained in section 3.1, given the
findings in tables 3, 4, and 5, the general lack of significance in table 6 stems
from a loss of power arising from differencing metrics that have estimation
error (Landsman and Magliolo [1988]).
TABLE 6
Comparison of IAS and NIAS Firms’ Change in Accounting Quality from the Period
before IAS Firms Adopt IAS to after
Earnings management Post − Post −
Metric Prediction Pre IAS Pre NIAS Difference
Variability of NI ∗ IAS > NIAS 0.0007 0.0001 0.0006†
Variability of NI ∗ over CF ∗ IAS > NIAS 0.2538 0.1041 0.1497
Correlation of ACC ∗ and CF ∗ IAS > NIAS 0.0177 −0.0263 −0.0440
Small Positive NI (SPOS) − −0.0645 −0.0908 0.0263
Metric
Large negative NI (LNEG) + 0.1805 0.2099 −0.0294
Value relevance
Price IAS > NIAS 0.1202 0.0318 0.0885
Good news IAS > NIAS 0.0265 −0.0086 0.0351
Bad news IAS > NIAS 0.0157 0.0556 −0.0399
firms) and matched sample of firms that did not (NIAS firms). The periods after IAS firms adopted IAS, that
is, the postadoption period, ends in 2003. The preadoption period begins in 1990 and the postadoption
period ends in 2003. The sample comprises 1,298 (587) IAS and NIAS firms in the postadoption
(preadoption) period.
fixed-effect indicator variables. The second-stage regression is [NI/P ]∗ = β 0 + β 1 RETURN + ε, where
† indicates significant difference between IAS and NIAS firms at the 5% level (one-sided).
6. Summary and Concluding Remarks

Our results indicate that the accounting amounts of firms that apply
IAS are of higher quality than those of non-U.S. firms that do not. The
accounting amounts we compare result from the interaction of features of
the financial reporting system, which include accounting standards, their
interpretation, enforcement, and litigation. Generally, we find that firms
applying IAS exhibit less earnings smoothing, less managing of earnings
towards a target, more timely recognition of losses, and a higher association
of accounting amounts with share prices and returns. Although we include
research design features to mitigate the effects of incentives and the eco-
nomic environment, we cannot be sure that our findings are attributable
to the change in the financial reporting system rather than to changes in

firms’ incentives and the economic environment.
Our inferences are based on comparisons of accounting quality metrics
for a broad sample of firms in 21 countries that adopted IAS between 1994
and 2003. In particular, we compare accounting quality metrics for firms
that apply IAS to those for a matched sample of non-U.S. firms that do not
in the period after the IAS firms adopt IAS. We generally find that IAS firms
have higher accounting quality than firms that do not apply IAS. Differences
in accounting quality between the two groups of firms in the period before
the IAS firms adopt IAS do not account for the postadoption differences.
We also compare accounting quality metrics for IAS firms in the periods
before and after they adopt IAS. We generally find that IAS firms evidence
an improvement in accounting quality between the pre- and postadoption
periods.
REFERENCES
ASHBAUGH, H. “Non-U.S. Firms’ Accounting Standard Choices.” Journal of Accounting and Public
Policy 20 (2001): 129–53.
ASHBAUGH, H., AND M. PINCUS. “Domestic Accounting Standards, International Accounting
Standards, and the Predictability of Earnings.” Journal of Accounting Research 39 (2001): 417–
34.
BALL, R.; S. P. KOTHARI; AND A. ROBIN. “The Effect of International Institutional Factors on
Properties of Accounting Earnings.” Journal of Accounting & Economics 29 (2000): 1–51.
BALL, R.; A. ROBIN; AND J. S. WU. “Incentives versus Standards: Properties of Accounting Income
in Four East Asian Countries.” Journal of Accounting & Economics 36 (2003): 235–70.
BALL, R., AND L. SHIVAKUMAR. “Earnings Quality in UK Private Firms: Comparative Loss Recog-
nition Timeliness.” Journal of Accounting & Economics 39 (2005): 83–128.
BALL, R., AND L. SHIVAKUMAR. “The Role of Accruals in Asymmetrically Timely Gain and Loss
Recognition.” Journal of Accounting Research 44 (2006): 207–42.
BARTH, M. E.; W. H. BEAVER; AND W. R. LANDSMAN. “The Relevance of the Value Relevance
Literature for Accounting Standard Setting: Another View.” Journal of Accounting & Economics
31 (2001): 77–104.
BARTH, M. E.; Y. KONCHITCHKI; AND W. R. LANDSMAN. “Cost of Capital and Financial State-
ment Transparency.” Working paper, Stanford University and University of North Carolina,
2007.
BARTOV, E.; S. GOLDBERG; AND M. KIM. “Comparative Value Relevance among German, U.S.
and International Accounting Standards: A German Stock Market Perspective.” Journal of
Accounting, Auditing and Finance 20 (2005): 95–119.
BRADSHAW, M. T., AND G. S. MILLER. “Will Harmonizing Accounting Standards Really Har-
monize Accounting? Evidence from Non-U.S. Firms Adopting US GAAP.” Working paper,
Harvard Business School, 2007.
BREEDEN, R. “Foreign Companies and U.S. Markets in a Time of Economic Transformation.”
Fordham International Law Journal 17 (1994): S77–96.
BURGSTAHLER, D., AND I. DICHEV. “Earnings Management to Avoid Earnings Decreases and
Losses.” Journal of Accounting & Economics 24 (1997): 99–126.
BURGSTAHLER, D.; L. HAIL; AND C. LEUZ. “The Importance of Reporting Incentives: Earnings
Management in European Private and Public Firms.” The Accounting Review 81 (2006): 983–
1016.
CAIRNS, D. “Degrees of Compliance.” Accountancy International (1999): 68–69.
CRAMER, J. S. “Mean and Variance of R 2 in Small and Moderate Samples.” Journal of Econometrics
35 (1987): 253–66.
DASKE, H. “Economic Benefits of Adopting IFRS or US-GAAP—Have the Expected Costs of

Equity Capital Really Decreased?” Journal of Business Finance and Accounting 33 (2006): 329–
73.
DASKE, H.; L. HAIL; C. LEUZ; AND R. VERDI. “Adopting a Label: Heterogeneity in the Economic
Consequences of IFRS Adoptions.” Working paper, Wharton School, 2007.
DECHOW, P. M. “Accounting Earnings and Cash Flows as Measures of Firm Performance: The
Role of Accounting Accruals.” Journal of Accounting & Economics 18 (1994): 3–42.
ECCHER, E., AND P. HEALY. “The Role of International Accounting Standards in Transitional
Economies: A Study of the People’s Republic of China.” Working paper, Massachusetts In-
stitute of Technology, 2003.
EWERT, R., AND A. WAGENHOFER. “Economic Effects of Tightening Accounting Standards to
Restrict Earnings Management.” The Accounting Review 43 (2005): 1101–24.
GREENE, W. Econometric Analysis. New York: MacMillan, 1993.
HEALY, P. M. “The Effect of Bonus Schemes on Accounting Decisions.” Journal of Accounting &
Economics 7 (1985): 85–107.
HUNG, M., AND K. R. SUBRAMANYAM. “Financial Statement Effects of Adopting International
Accounting Standards: The Case of Germany.” Review of Accounting Studies 12 (2007): 623–57.
INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC). Framework for the Preparation and
Presentation of Financial Statements. London, UK: IASC, 1989.
INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO). A Resolution on IASC
Standards. Presidents’ Committee of IOSCO. Madrid, Spain: IOSCO, 2000.
LAND, J., AND M. LANG. “Empirical Evidence on the Evolution of International Earnings.” The
Accounting Review 77 (2002): 115–34.
LANDSMAN, W., AND J. MAGLIOLO. “Cross-Sectional Capital Market Research and Model Speci-
fication.” The Accounting Review 63 (1988): 586–604.
LANG, M.; J. RAEDY; AND W. WILSON. “Earnings Management and Cross Listing: Are Reconciled
Earnings Comparable to US Earnings?” Journal of Accounting and Economics 42 (2006): 255–83.
LANG, M.; J. RAEDY; AND M. YETMAN. “How Representative Are Firms That Are Cross Listed
in the United States? An Analysis of Accounting Quality.” Journal of Accounting Research 41
(2003): 363–86.
LEUZ, C. “IAS versus U.S. GAAP: Information Asymmetry-Based Evidence from Germany’s New
Market.” Journal of Accounting Research 41 (2003): 445–27.
LEUZ, C.; D. NANDA; AND P. WYSOCKI. “Earnings Management and Investor Protection: An
International Comparison.” Journal of Financial Economics 69 (2003): 505–27.
MYERS, J. N.; MYERS, L. A.; AND D. J. SKINNER. “Earnings Momentum and Earnings Manage-
ment.” Journal of Accounting, Auditing, and Finance 22 (2007): 249–84.
PAGANO, M.; A. RÖELL; AND J. ZECHNER. “The Geography of Equity Listings: Why Do Companies
List Abroad?” Journal of Finance 57 (2002): 2651–94.
STREET, D., AND S. GRAY. Observance of International Accounting Standards: Factors Explaining Non-
Compliance. ACCA Research Report No. 74. London, UK: Association of Chartered Certified
Accountants, 2001.
TARCA, A. “International Convergence of Accounting Practices: Choosing Between IAS and US
GAAP.” Journal of International Financial Management and Accounting 15 (2004): 60–91.
VAN TENDELOO, B., AND A. VANSTRAELEN. “Earnings Management under German GAAP versus
IFRS.” European Accounting Review 14 (2005): 155–80.
WATTS, R. L., AND ZIMMERMAN, J. L. Positive Accounting Theory. New York: Prentice Hall, 1986.
WYSOCKI, P. “Assessing Earnings and Accruals Quality: US and International Evidence.” Working
Paper, Massachusetts Institute of Technology, 2005.

Barth 2008 Jar Ias and Accounting Quality Main

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Barth 2008 Jar Ias and Accounting Quality Main

Hochgeladen von

Copyright:

Verfügbare Formate

DOI: 10.1111/j.1475-679X.2008.00287.

International Accounting Standards

Received 15 March 2005; accepted 20 September 2007

We examine whether application of International Accounting Standards

∗ Graduate School of Business, Stanford University; †Kenan-Flagler Business School, Univer-

greater opportunity for firms to manage earnings, thereby decreasing ac-

to the change in the financial reporting system rather than to changes in

discretion in financial reporting.

2.2 IAS AND DOMESTIC STANDARDS COMPARISONS

[2005] show that applying accounting standards that limit management’s

this comparison is an alternative approach to determining whether differ-

attributable to differences in the financial reporting system rather than to

Raedy, and Wilson [2006]). 14 We interpret a smaller variance of the change

NI it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it

+ α5 DISSUE it + α6 TURN it + α7 CF it + α8 AUD it + α9 NUMEX it

+ α10 XLIST it + α11 CLOSE it + εit . (1)

NUMEX = the number of exchanges on which a firm’s stock is listed;

+ α5 DISSUE it + α6 TURN it + α7 CF it + α8 AUD it + α9 NUMEX it

+ α10 XLIST it + α11 CLOSE it + εit (2)

equation. In all likelihood they differ.

+ α5 DISSUE it + α6 TURN it + α7 AUD it + α8 NUMEX it

+ α9 XLIST it + α10 CLOSE it + εit (3)

ACC it = α0 + α1 SIZE it + α2 GROWTH it + α3 EISSUE it + α4 LEV it

+ α5 DISSUE it + α6 TURN it + α7 AUD it + α8 NUMEX it

+ α9 XLIST it + α10 CLOSE it + εit (4)

Our metric for managing towards positive earnings is the coefficient on

+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUDit

+ α10 NUMEX it + α11 XLISTit + α12 CLOSE it + εit (5)

POST (0, 1)it = α0 + α1 SPOS it + α2 SIZE it + α3 GROWTH it + α4 EISSUE it

+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUD it

+ α10 NUMEX it + α11 XLIST it + α12 CLOSE it + εit (6)

3.2.2. Timely Loss Recognition. We measure timely loss recognition as the

+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUD it

+ α10 NUMEX it + α11 XLIST it + α12 CLOSE it + εit (7)

+ α5 LEV it + α6 DISSUE it + α7 TURN it + α8 CF it + α9 AUD it

+ α10 NUMEX it + α12 XLIST it + α12 CLOSE it + εit (8)

is assessed using a two-sided alternative, throughout we use a 5% significance level to assess

Panel B: Industry breakdown

Panel C: Year breakdown

likely to list on a U.S. stock exchange, and have a smaller percentage of

NI ∗ , 0.0026 versus 0.0021. This difference of residual variances of

5.2 PREADOPTION PERIOD

the preadoption period. Thus, differences in accounting quality between

5.3 COMPARISON OF POST- AND PREADOPTION PERIODS FOR IAS FIRMS

5.4 DIFFERENCE IN CHANGES FOR IAS AND NIAS FIRMS

6. Summary and Concluding Remarks

to the change in the financial reporting system rather than to changes in

DASKE, H. “Economic Benefits of Adopting IFRS or US-GAAP—Have the Expected Costs of

Das könnte Ihnen auch gefallen